Despite rapid growth in China's Internet market over the years,
Chinese online media company, Sina (
), has seen its stock decline from a high of $133 in April 2011 to
the current level of around $46. Declining market share, increasing
operating expenses and the slow progress in capitalizing its micro
blogging website Weibo, are some of the factors that have eroded
the stock value. Additionally, the slowdown in the growth rate
of Chinese companies on account of macro headwinds and the decline
in Chinese web stocks on delisting concerns in the U.S.
have further pulled down Sina's stock price in the last few
Except for a temporary decline in 2009, Sina's top line has
historically registered double digit growth. Strong traffic growth
across its major product lines, including Weibo, PC Internet portal
and mobile Internet portal continue to fuel Sina's growth rate.
Our price estimate of $67.51 for Sina
places our valuation at a premium of almost 50% over the current
market price. While we are wary of factors that could impact Sina's
short-term growth, we believe that the company continues to have
strong fundamentals that would help sustain growth in the long run.
In this article we list down certain key factors that reiterate our
belief in the same.
Check out our complete analysis of Sina
Chinese Advertising Market Offers Rapid Growth
Due to macro headwinds the overall Chinese display ad market
registered a decline in the first two quarters of
2012. However, as evident from the strong growth in Sina's
advertising revenue in Q3 2012, the Chinese advertising market
registered positive growth in the third quarter. Sina derives close
to 65% of its valuation from display ads as per our estimate. Its
advertising revenue marked a 19% y-o-y and 17% q-o-q increase last
quarter, backed by strong growth in automobiles, FMCG, IT and
However, Sina claims to have witnessed weaker conditions since
September 2012 as companies have become cautious about their
advertising spending in light of global economic worries.
Additionally, the lack of any significant media events this
quarter might slow down its advertising revenue growth rate.
Nevertheless, China remains one of the
fastest growing economies in the world, and we believe
that with increasing Internet penetration, the
online advertising market in the country offers immense
Though the total number of Internet users in China (513 million)
are double compared to the U.S. (245 million), the former still
offers a higher opportunity for growth for Internet companies. As
Internet World Stats
, the Internet penetration in China is close to 38%, while that in
U.S. is over 78%. China is expected to witness an increase in its
total number of Internet users in the coming years.
Monetization Of Weibo To Stabilize Sina's Declining Share
In Chinese Ad Market
Sina has lost almost 50% of its market share in the Chinese ad
market since 2008, from 14.1% in 2008 to an estimated 7.7% in 2011.
Incurring huge investments to develop its micro blogging website,
Weibo, Sina expects the same to become a significant
revenue contributor for the company. Though the pay offs
from the monetization of Weibo are not likely to be very prominent
this year, we expect Weibo to be a major factor driving growth in
Sina's online display revenues.
Analogous to a hybrid of Twitter and Facebook, Weibo has been
increasingly gaining popularity among users in China, and is
estimated to be used by 30% of Internet users in the country by
2013. Weibo continues to attract an expanding user base and
register higher user activity. In Q3 2012, the total number of
registered users on Weibo increased to 424 million, a 15.2%
increase from 368 million users at the end of June 2012.
Additionally, the average number of daily active users increased by
16% in Q3 2012, reaching 42.3 million.
Sina has recently taken a number of steps to accelerate its
monetization efforts for Weibo. It launched the Weibo display
advertising system for brand advertising in April this year. By
incorporating a social and Internet graphs recommendation engine,
the new system allows relevant advertising to be more targeted,
thereby increasing its relevance.
Additionally, Sina started testing the advertising system
in a news feed, which targets small
and medium-size enterprises, in Q3 2012. This advertising system
allows any user to place sponsored feed at the top of the news feed
for its followers. The company intends to launch the complete
promoted feed advertising system by the end of this quarter.
Sina has also stepped up its efforts to develop its mobile
platform, which we feel would add another medium
to effectively monetize Weibo. (Read: Sina Enhances Its
Mobile Portfolio By Partnering With AutoNavi)
Advertising revenues from Weibo as a proportion of Sina's total
advertising revenues increased to 16% in Q3 2012, a significant
jump from the 10% in Q2 2012. We expect the proportion to be even
higher in the coming quarters.
Increasing Operating Expenses Is A Short Term
Sina's operating expenses, specifically sales & marketing
and research expenses, were at an all-time high in 2011 which led
to a significant decline in gross margins. Much of the increase can
be linked to its growing investment in Weibo
Sina spent around $110 to $200 million in 2011 for its Weibo
platform and is expected to invest another $160 million in
The continuous increase in Sina's marketing and
product development cost has put a downward pressure on its bottom
line. However, going forward we expect Sina to reduce its
operating expenses and forecast the gross margins to stabilize in
the future. Additionally, we believe that as the current
investments in developing Weibo start paying off, Sina could
realize higher revenues at a similar cost base, which could help
However, if Sina fails to control its expenses and continues to
spend at the current rate, its cost burden will weigh on its cash
flows and impact its value significantly.
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